These ETFs Could Soar Starting in October

The month of October has an interesting track record when it comes to the U.S. equity market. This is the month when the crashes of 1929 and 1987 took place. Those with shorter-term memories likely remember that October 2008 was less than pleasant for stocks as well.

As the Stock Trader's Almanac points out, October has reversed 11 bear markets since the end of World War II. Additionally, October can be a good time to establish long positions because it is the last month in the six-month period known for being historically unfavorable to stocks.

As S&P Capital IQ said in a recent research note, "President Obama has been supportive of broadband expansion, through government subsidies, enticing carriers to build out their networks. In addition, the Federal Communications Commission's chairman has been a proponent of moving wireless spectrum from television broadcasters to telecom carriers. If Governor Romney wins, a new chairman would take over and could scuttle these efforts."

The biggest risk to VOX or any other U.S.-focused telecom ETF continuing the good times for the rest of this year is that many of these ETFs have already surged. VOX, which allocates 45 percent of its combined weight to Verizon (VZ) and AT&T (T), is up 21.2 percent year-to-date, a run that is nearly 700 basis points better than the SPDR S&P 500 (SPY).

Then again, it has been investors' preference for low-beta fare that has driven VOX higher. If that trend persists through year-end, VOX makes for a good October buy.

Like telecom, materials accounts for a relatively small percentage of the S&P 500's weight, but the two sectors are far removed from each other in terms of beta and risk profile. Still, materials stocks make for a sound October bet. The Stock Trader's Almanac notes the S&P 500 Materials Sector has a five-year average return of 16.4 percent from mid-October through mid-May.

Yes, the pharmaceuticals sector is historically a good one to embrace in October, but there is more to the story with XLV or any of the comparable funds. Like VOX, this is another presidential election play, and as is the case with the telecom ETF, investors who are long XLV might want to be pulling for President Obama.

For as controversial as Obamacare has been, it has been good for the pharmaceuticals sector. XLV is up almost 16 percent this year and when it makes a new high, it is not just a 52-week high. It is a new all-time high.

The thesis is simple, as S&P Capital IQ points out.

""Health care is likely the most obvious sector that would benefit from President Obama holding on, as health care reform would proceed unabated," S&P Capital IQ said in the note. "Most sub-industries have been working toward implementing the law. The pharmaceutical industry would proceed with its plan to pay upfront fees in increased Medicaid rebates and Medicaid discounts with the promise of expanding the insured market come 2014. We also see generic firms and drug distributors benefiting from the government's push toward lower-cost drugs in the newly expanded patient populations. Meanwhile, hospitals should benefit from a sharp drop in total uncompensated care with an increase in insured patients."